SECURITIES AND EXCHANGE COMMISSION v. CAVANAGH

The opinion of the court was delivered by: DENISE COTE, District Judge

OPINION & ORDER

This securities fraud action grew out of a "pump and dump"
scheme engineered by William Levy ("Levy"), Thomas Cavanagh
("Cavanagh") and Frank Nicolois ("Nicolois"). After entry of a
preliminary injunction in 1998, the action was stayed for an
extended period of time during a criminal investigation and
prosecution of Levy, Cavanagh and Nicolois for false statements
made in connection with this litigation. With the conclusion of
the criminal proceedings, this civil litigation has resumed and
the Securities and Exchange Commission ("SEC") now brings a
motion for summary judgment against those defendants who have not
settled this litigation.*fn1

On March 13, 1998, the SEC filed this action, alleging that
certain defendants offered and sold securities of Electro-Optical
Systems Corporation ("EOSC") in violation of the registration and
anti-fraud provisions of the securities laws. The SEC asserted
that the defendants had defrauded the public  principally small,
on-line investors  of millions of dollars. That same day, a
temporary restraining order was issued which, inter alia,
suspended trading by the defendants in EOSC stock and froze the
assets of defendants and the accounts of relief defendants that
contained EOSC stock or the proceeds from the sales of the EOSC
stock.

A preliminary injunction hearing ("Hearing") ran from March 31
to April 8. For the reasons explained in an Opinion of April 20,
a preliminary injunction was issued. SEC v. Cavanagh,
1 F. Supp.2d 337 (S.D.N.Y. 1998) ("April 20 Opinion"). The April 20 Opinion found that the SEC had shown a substantial likelihood of
success in proving that Cavanagh, Levy, Milesone, three companies
described herein as the Spanish Nominees, George Chachas
("Chachas"), Brooksbank, Hantges, the Optimum Fund and Agira
Trading violated Section 5. The Court entered a preliminary
injunction against Levy, Cavanagh, Milestone, Chachas, and the
Spanish Nominees, and freeze orders against all of these
defendants. The April 20 Opinion found that the SEC had shown a
substantial likelihood of success in proving that Cavanagh,
Milstone, Chachas and the Spanish Nominees had violated Sections
17(a) and 10(b). Levy and one relief defendant appealed. The
injunction was affirmed on appeal. SEC v. Cavanagh,
155 F.3d 129 (2d Cir. 1998).

In October 1998, the action was stayed at the request of, among
others, defendants Cavanagh, Nicolois, Milestone, Levy and relief
defendants Karen Cavanagh and Beverly Nicolois due to a criminal
investigation. On March 13, 2003, Cavanagh and Nicolois requested
that the stay be lifted since no prosecution had begun. They
argued that the civil action be dismissed because of the "long,
detrimental" stay. In fact, a sealed indictment had been returned
on February 26, 2003.

At a conference on March 27, 2003, the defendants' motion to
dismiss was scheduled. On April 4, Cavanagh and Nicolois learned
of their indictment and requested a reimposition of the
stay.*fn2 On April 22, the Court denied their request in light of the
defendants' stated intention to move to dismiss the action
because of the length of the stay. Although they made no offer to
forego that motion if a stay were reimposed, the defendants never
filed the motion. On February 11, 2004, following the close of
discovery, the SEC moved for summary judgment as to those
defendants with whom it has not already settled.

Defendants Cavanagh, Nicolois, their wives (who are named as
relief defendants), and their company Milestone, oppose summary
judgment. They rely on their attorney's affidavit, on a
Rule 56.1 Statement that contests relatively few of the 157 paragraphs in
the SEC's Rule 56.1 Statement, and on excerpts from the record
created at the Hearing. Cavanagh, Nicolois and Milestone do not
contest that a fraud occurred. They argue principally that they
relied on the advice of their attorney, Levy, and that the SEC
has not sufficiently shown their scienter to establish a
violation of Sections 17(a) and 10(b).

Defendants Franklin and Brooksbank also agree that the public
was defrauded. They argue, however, that the SEC has failed to
show that it is entitled to summary judgment since there are
questions of fact as to whether Franklin and Brooksbank's sales
of shares were exempt from registration under one of three
possible exemptions.

In the event summary judgment is granted, defendants Cavanagh, Nicolois, and Milestone do not object to the relief
sought by the SEC. Defendants Hantges, who concedes liability
under Section 5, Franklin, and Brooksbank do object to the relief
sought. Relief defendants Karen Cavanagh, Beverly Nicolois,
Cromlix, and Kaufer only contest the underlying liability of the
defendants, but not the relief sought against them.

Background

The following facts are undisputed, unless otherwise noted. A
summary of the scheme precedes a more detailed description of the
evidence. WTS Transnational, Inc. ("WTS") was a small development
stage company with a dire need for capital. Cavanagh, Nicolois,
and their investment banking firm Milestone, agreed to raise
money for WTS. Levy, an attorney, prepared many of the legal
documents and conducted many of the negotiations on behalf of
Cavanagh, Nicolois and Milestone. They located a blank check or
shell corporation called Curbstone as the vehicle to take WTS
public.

At the time that WTS merged with Curbstone through a reverse
stock acquisition, Levy, Cavanagh, Nicolois, Milestone, and three
offshore companies (the Spanish Nominees) with whom they were
associated as described below, obtained for pennies per share a
large block of shares of the new public company, renamed EOSC.
There was no public disclosure of this transfer of shares or of
the fact that this group now controlled virtually all of the public float of EOSC. The Spanish Nominees, Cavanagh and
Nicolois resold the shares into the public market after Cavanagh,
Nicolois and others had taken the steps described below to
inflate the price for the EOSC shares to over $5 per share.

Curbstone was owned by four partners, including Brooksbank,
Franklin, and Hantges (collectively, the "Curbstone Management
Group"). The fourth partner, Chachas, was the person principally
responsible for the negotiations with Levy and the Milestone
group. The four Curbstone partners were paid in cash and in EOSC
shares for their sale of Curbstone. They each profited handsomely
from these transactions, including through an option agreement
that gave them the opportunity to sell their shares at prices
ranging from $3 to $6 over the course of the months following the
merger. With this overview, a more detailed description of the
chronology of events follows.

WTS, a private company, was trying to develop optical
fingerprint recognition technology. It needed money to do so.
Charles Weaver ("Weaver"), the President of WTS, met Cavanagh and
Nicolois in July 1997. Milestone, a company owned by Cavanagh and
Nicolois, agreed to procure financing for WTS. Cavanagh and
Nicolois told Weaver that they had $4 million in off-shore
accounts that there were willing to invest in the company through
a private placement.

On September 22, WTS and Milestone executed a letter of intent
that allowed Milestone the exclusive right to raise $1 million in equity capital for WTS in a private placement offering
in exchange for 30% of the WTS stock, and after raising such
money, a one year option to raise an additional $3 million for
another 10% of the stock. In total, WTS agreed to give up 40% of
its stock for $4 million.

Meanwhile, Levy began to search for a public shell company to
merge into WTS. Levy first informed Weaver of this fact in
November 1997, when he told him that "an investor" wanted a
public company. Levy asserted that WTS must become public before
the investor would give it money. Levy also tried to change the
terms of the investment. He wanted WTS to give up 40% of its
stock for a $1 million investment. Weaver immediately complained
to Nicolois. Weaver specifically complained that Levy's plan for
a $5 per share follow-on investment would result in an
"astronomical" market capitalization of $53 million. According to
Weaver, a market capitalization of approximately $3 million
following a $1 million investment, or $10 to $15 million
following a $4 million investment was more appropriate.

On November 13, Weaver and Nicolois executed a Letter of
Intent. Milestone agreed to use its best efforts to have
Milestone or its clients advance to WTS $1 million as a note
convertible into 30% of WTS's issued and outstanding common stock
and then to raise an additional $3 million in funds for WTS. WTS
would become a wholly owned subsidiary of a publicly traded
company before December 15, with WTS shareholders receiving 95%
of the issued and outstanding capital of the new company and the shell's shareholders retaining 5%.

After the execution of the letter of intent, Cavanagh caused
the Optimum Fund, a Grand Cayman entity over which Cavanagh had
control, to make a $500,000 bridge loan to WTS, less fees. The
bridge loan was convertible into equity.

Meanwhile, Levy selected a shell company, Curbstone. Throughout
the negotiations that followed, the shares owned by the Curbstone
Management Group were treated as one block.*fn3 Chachas was
authorized to negotiate the merger with WTS. Chachas envisioned
two payments modeled on an earlier transaction, the Capital
Advisors Acquisition Corporation ("Capital Advisors")
transaction, that he had negotiated with Levy. As reflected in
contemporaneous documents, Chachas expected that the Curbstone
Management Group would receive $125,000 in cash and $1.2 million
through "market makers" for 300,000 shares in the new company
("Curbstone Management Shares"), priced in three equal units of
between $3 to $5 per share.

Levy acted as counsel for both Milestone and WTS in the
negotiations with Chachas. Draft term sheets specified that the
Curbstone Management Group was to provide "free trading"
Curbstone stock. On December 2, Chachas sent Levy what he characterized as the
only two acceptable alternatives for closing the reverse merger
and "our best and final effort." Under the first alternative, the
Curbstone Management Group would be paid (1) $125,000 in cash at
a closing on December 5, and a further payment of $2.352 million
in four installments between December 16 and March 13, 1998. The
latter payment was for the purchase of 542,000 shares in the new
company owned by the Curbstone Management Group. To insure
performance by the purchasers, the Curbstone transfer agent would
not release newly issued common stock to WTS or cancel the
2,596,659 shares of Curbstone common stock due to be cancelled at
the time of the merger until the first installment payment of
$450,000 had been received, which was due no later than December
16.

The second alternative presented by Chachas included an
immediate payment of a non-refundable $10,000 deposit, with the
balance of the $125,000 in cash and a first installment payment
of $450,000 due at a December 16 closing. The remainder of the
542,000 Curbstone Management Shares would be available for
purchase in three installments spanning the time between December
16 and March 13, 1998. Under both alternatives, there would be no
change in the Curbstone transfer agent until March 15, 1998, or
until all of the 542,000 shares had been acquired, whichever
occurred first.

On December 3, Chachas sent Levy a written outline of the terms
reflecting their further discussions. They finally agreed on the following:

1) A $25,000 non-refundable payment, which Levy sent
to Chachas on December 8.

2) A $100,000 payment for the sale of 2,563,000
Curbstone shares controlled by the Curbstone
Management Group, which payment Levy sent to Chachas
on December 12.

3) The purchase of 150,000 Curbstone Management
Shares for $450,000 or $3 per share, which payment
was also made on December 12.

4) An oral agreement that Milestone had three options
to purchase the Curbstone Management Shares as
follows: 150,000 shares at $4 per share by February
13, 1998; 150,000 shares at $5 per share by March 13,
1998; and 92,000 shares at $6 per share by April 17,
1998.

5) A lock up agreement in which the Curbstone
Management Group agreed not to sell an additional
200,000 shares they held until March 15, 1998.

Under this agreement, the vast majority of the shares held by
the Curbstone Management Group would not be cancelled. Instead,
they would be sold for $100,000 on December 12. The sale of these
shares made the market fraud possible. Chachas understood at
first that the shares were being purchased by Milestone. After
the agreement for the sale was entered, however, he was told that
for the first time that the share certificates were to be issued
in the names of three Spanish companies: Cambiarios S.L.
("Cambiarios"), Construcciones Solariegas, S.L.
("Construcciones"), and Customer Safety, S.L. ("Customer Safety")
(collectively, the "Spanish Nominees"). Chachas understood the
Spanish Nominees to be clients of Milestone. No member of the
Curbstone Management Group spoke to the Spanish Nominees or
performed any due diligence regarding them. The Curbstone
Management Group asserts that it relied solely upon representations contained in the Purchase Agreements
described below, which stated that the purchasers were accredited
investors and had "no present agreements" to resell the shares.

As a result of selling the approximately 2.5 million shares to
the Spanish Nominees, it was no longer the case that all but 5%
of the shares of the new entity would be traded for WTS stock.
Rather, Milestone and those associated with it held 16% of the
EOSC stock, and this stock constituted the vast majority of the
EOSC stock that was issued without a restrictive legend and was
thus available to be sold to the public.

Chachas and Brooksbank for Curbstone, and Weaver for WTS,
executed the Exchange Agreement ("Exchange Agreement"). The
Exchange Agreement bears the date December 5, and provides that
Curbstone would deliver to the WTS shareholders 15,488,120 shares
of authorized, but previously unissued unregistered shares of
Curbstone in exchange for all of the issued and outstanding
shares of WTS owned by the WTS shareholders. It represents that
the Curbstone shares given to WTS in exchange for the WTS stock
had not been registered and would be issued with a restrictive
legend. It states that the authorized capital stock of Curbstone
consisted of 3,521,876 shares of stock issued and outstanding
prior to the closing. It provides that the closing would be held
on or before January 16, 1998. Weaver and WTS were not informed
of the sale of the shares to Milestone and the Spanish Nominees.

On December 8, Levy wired Chachas $25,000  the non-refundable purchase fee. It was paid by Milestone through the client escrow
account that Levy maintained for Milestone. None of this money
came from or was reimbursed by the Spanish Nominees.

On December 5, Chachas faxed to Levy a single form of a
purchase agreement for the purchase of the 2,563,000 shares. Levy
faxed the form to Milestone that day, and Nicolois, after
consulting with Cavanagh, filled in the names and addresses of
the Spanish Nominees, the number of shares, the price per share
and dated the agreements December 1, 1997. With the transaction
split into three units no one purchaser owned over 5% of the EOSC
stock, thereby avoiding the Section 13(d) reporting requirements
under the Exchange Act. After consulting again with Cavanagh,
Nicolois faxed the purchase agreement to Tur Ortola in Spain on
December 10. Tur Otola executed at least the agreement for
Cambiarios. On this same date, Brooksbank and Chachas executed a
corporate resolution directing the transfer agent to issue and
cancel the shares for the WTS/Curbstone transaction. They sent
the form to the agent on December 18.

On December 11, the three purchase agreements ("Purchase
Agreements"), dated as of December 1, and executed on behalf of
the Spanish Nominees, were faxed to Milestone's offices. Each of
the Spanish Nominees was a newly formed entity. With this
purchase, the Spanish Nominees acquired the entire 2.5 million
share block for $.039 per share. The Purchase Agreements included
the representations by the Curbstone Management Group that the shares "have been registered securities and will be free
of restrictive legend upon delivery," and that Chachas would hold
the shares until "all conditions for the Closing of the Agreement
for Exchange of Stock Between Curbstone and WTS . . . have been
satisfied. . . ." The Purchase Agreements did not encompass the
shares to be acquired under the option agreement.

During this time, Cavanagh and Nicolois were preparing for the
resale into the public market of the shares sold to the Spanish
Nominees. They called a broker, Cosimo Tacopino ("Tacopino") at
Donald & Co., and advised him that they would soon receive a
large Curbstone/EOSC stock position and that he would have to
make a market in EOSC so that they could liquidate the position.
On December 11, Cavanagh and Nicolois told Tacopino that they
would be sending Donald & Co. "Express Forms" to open accounts
for the three Spanish Nominees and one for another Spanish
company called Inversora Dactilar ("Inversora"). Nicolois filled
out the new account applications for the Spanish Nominees and
faxed them to Donald & Co. Tacopino spoke to no other
representative of the Spanish Nominees prior to opening these
accounts. Cavanagh and Nicolois instructed Tacopino to use these
accounts to liquidate EOSC stock upon its receipt.

When Chachas wrote Levy on December 12, to advise him that the
agreement between Curbstone and WTS had been fully executed in
his opinion and that the transaction had closed, Levy wired
Chachas $550,000, representing $100,000 for the sale to the
Spanish Nominees of the 2.5 million share block, and $450,000 for the exercise of the first round of options under the option
agreement. The money was sent from the Milestone escrow account
and not from the Spanish Nominees. Levy immediately sent Chachas
a Closing Memorandum noting that the "prerequisites have been
fulfilled (except certain schedules, shareholder lists and
certain signatures which should all be delivered to you by
Tuesday)," December 16. On December 19, Chachas distributed the
$550,000 among the four members of the Curbstone Management
Group, as well as the sum earned through a parallel acquisition
negotiated between Levy and the Curbstone Management Group.

At this same time, Milestone was managing a $1 million offering
of EOSC shares purportedly under Regulation S. First, a bridge
loan from the Optimum Fund was converted into 1,054,241 EOSC
shares at a price of $.47 per share. Then Agira Trading
("Agira"), a British Virgin Island company that Cavanagh and
Nicolois controlled, purportedly invested $500,000 for an
identical number of shares at the same price per share.

On December 16, Chachas wrote to Levy to confirm the division
among the Spanish Nominees of "2,563,000 Free trading [shares]
purchased at $100,000." Chachas obtained a CUSIP number and was
notified that the company would bear the OTC trading symbol of
EOSC.

On December 17, Chachas instructed Curbstone's transfer agent
American Registrar and Transfer Company ("ARTCO") to issue
17,596,601 new Curbstone shares; cancel Curbstone stock certificates representing 33,659 shares; transfer record
ownership of 2,563,000 shares to the Spanish Nominees, reissue
the certificates to them "WITHOUT LEGEND", send the
certificates to Levy; and forward an updated shareholder list to
Chachas. (Emphasis in original.) Richard Day ("Day"), the
president of ARTCO, completed these tasks within two hours
because of Chachas' desire that it be done as quickly as
possible. Day shipped the certificates to Levy on December 18.
That afternoon, Chachas and Brooksbank, acting as the "entire
Board of Directors" of Curbstone executed a corporate resolution
accepting their own resignations as officers and directors, and
appointing in their stead WTS employees as officers and
directors. The transfer agent also sent 500,000 shares to Levy,
2,108,481 shares to Milestone, and 857,081 shares to Inversora
Dactilar, S.L., a Spanish entity that Cavanagh indicated would
provide additional financing for EOSC.

On December 19, Cavanagh told Tacopino that the WTS/Curbstone
deal had been completed and to start making a market in EOSC
stock. No public announcement had yet been made about the
creation of EOSC. Tacopino was told by the head of compliance at
Donald & Co. that the market had to set the price of EOSC stock.
Quotes on the NSAD bulletin board consist of bid and ask prices.
The former is the price at which a market maker is willing to
buy; the latter is the price at which a market maker is willing
to sell. At 9:56 a.m., Tacopino posted an initial Donald & Co.
quote of $.50 bid and no ask price. Within ten minutes, Cavanagh called Tacopino and said that he wanted the
bid price to be at or above $5, and that Tacopino had to keep the
market price at or above $5 per share. Tacopino told Cavanagh
that he was not permitted to raise the bid price until a street
order or participation from other market makers justified it.
Cavanagh assured Tacopino that there would be plenty of orders
coming. Cavanagh and Nicolois assured Tacopino that "they would
be constantly bringing in buying whether through other brokerage
firms, PR firms" or otherwise.

Cavanagh immediately placed a buy order with Ara Proudian
("Proudian") at Alexander Westcott to buy 500 shares of EOSC at
$7 per share through the account of the Optimum Fund.*fn4
Cavanagh insisted that the order be at $7 over Proudian's
objection that that was out of line with the current market
price. (A share price of $7 reflected a market capitalization for
EOSC of $140,000,000.) When Proudian placed the order with
Tacopino at $7, Tacopino's only response was "sold." Since Donald
& Co. did not yet have any EOSC stock in its inventory, the sale
created a short position in Donald & Co.'s proprietary trading
account. Cavanagh and Nicolois had told Tacopino that the
accounts of the Spanish Nominees would be available to him to
cover his short position at or above $5 per share.

Based on this sale, at 10:21 to 10:22 a.m., Tacopino changed the Donald & Co. bid to $5 and ask to $7. A second trade in EOSC
occurred at 10:53 a.m. Jean-Pierre Neuhaus ("Neuhaus"), an
associate of Cavanagh and Nicolois, placed the order through the
account of Banca del Gottardo in Zurich, Switzerland Cavanagh
and Nicolois later gave Neuhaus 130,000 EOSC shares for free out
of the Construcciones account.*fn5

A third trade of EOSC stock occurred at 11:13 a.m. A Milestone
client named Bernd Stieghorst, with Cavanagh's participation,
placed an unsolicited order to buy 2,500 shares at or about $5 ½
Tacopino did not charge either Stieghorst or Cavanagh any
commission on the transaction. Cavanagh and Nicolois later gave
Stieghorst 70,000 EOSC shares for free.*fn6

A fourth trade of EOSC stock occurred at 2:10 p.m. Chachas
placed a market order for 100 EOSC shares through the e-trade
account owned by Chachas and Brooksbank in the name of Dillon
Trading. The order was filed at $5 7/8. When Cavanagh and
Nicolois called Tacopino later on December 19 to inquire about
the EOSC trading for the day, they expressed disappointment and
Cavanagh assured Tacopino that he "would be sending in buy orders
and there would be other retail firms getting involved, and the
stock should trade heavily." Levy's secretary and the boyfriend
of Nicolois' daughter later placed orders; they sold their stock
for a profit in February. After the close of the market on December 19, Curbstone made
its first public announcement of the WTS acquisition. The
announcement was reported on the business wire. The announcement
included the following:

Curbstone Acquisition Corp., a public company, Friday
announced that it had completed the acquisition of
100 percent of the stock of WTS Transnational Corp.,
a privately held company, in exchange for the
original issuance of 15,488,120 shares of Curbstone
common stock. Curbstone has changed its name to
Electro-Optical Systems Corp. The Bulletin Board
symbol has been changed to "EOSC." The directors and
officers of Curbstone have resigned and have elected
the directors and officers of WTS to succeed them.

The announcement did not disclose the sale of stock to the
Spanish Nominees, the existence of the option and lock-up
agreements between Milestone and the Curbstone Management Group,
that there were over 20 million shares of Curbstone issued and
outstanding, or that 3.5 million shares of purportedly
free-trading Curbstone stock, virtually the entire market float
of Curbstone, was under the control of Cavanagh and Nicolois. The
market float is the shares allegedly available for trading in the
public market.

On December 23, Chachas filed a Curbstone Form 8-K, the
document on which a registered company reports a change in
control. Levy, as the attorney for the merger had responsibility
for this filing, but had asked Chachas to do it. Chachas asserts
that he consulted with Levy regarding the contents, but Levy
denies that. Among other things, the Form 8-K did not disclose
the sale of shares to the Spanish Nominees, the option agreement, the lock-up, or the transfer of stock to Levy and to Milestone.
It represented that no broker was associated with the transaction
and that no fee had been paid to a broker despite the substantial
payments to Cavanagh and Nicolois. The public was not advised
that the market float consisted of millions of shares and that it
was controlled by Milestone and those associated with Milestone.

Between December 24 and 26, the shares for the Spanish Nominees
were deposited into trading accounts at Donald & Co. Cavanagh and
Nicolois soon began directing the distribution of about one
million of these shares to twenty-nine friends, relatives and
business associates. In this connection, Cavanagh and Nicolois
ordered the opening of eight new customer accounts at Donald &
Co. to receive some of this stock. These accounts included those
of various relief defendants including Cromlix.*fn7 Cavanagh
and Nicolois caused 100,000 EOSC shares to be transferred into
the Cromlix brokerage account.*fn8 Cavanagh and Nicolois
told Tacopino that these transfers represented their compensation
on the deal. Tur Ortola also told Tacopino that this stock was the compensation due Cavanagh and Nicolois on the
EOSC deal. All orders to transfer stock and proceeds originated
with Milestone in New York; none of the orders came from Spain.

Between December 19, and early March 1998, Tacopino, who
controlled nearly the entire float of EOSC stock, kept the price
above $5 per share despite heavy sales after January 16 of the
shares originally sent to the Spanish Nominees. Tacopino believed
that if he allowed the price to go above $5 to $6 his ability to
sell would have ended. In this range, however, he was able to
sell a continuous stream of shares. With rare exceptions,
Tacopino liquidated the stock by trading "from the short side."
This was the pattern he had followed in about 40 to 50 prior "Reg
S" deals on which he had worked with Cavanagh and Nicolois. By
selling short, he avoided the risk of a drop in price. Cavanagh
and Nicolois had daily conversations with Tacopino about how the
stock was trading and how he was liquidating the dozen or so
accounts that they controlled. They told him which accounts
should be used to cover each day's short positions.

In late December, Tacopino sold 102,100 shares from the
Cambiarios account at the direction of Cavanagh and Nicolois for
$555,260.07. In January 1998, at their direction, Tacopino sold
724,900 shares through the Cambiarios account for net proceeds of
$3,775,704.03.

On January 9, 1998, Cavanagh told Tacopino "that there would be good things happening" in the EOSC stock and he should be
long, not short, on the stock. Tacopino went from a position of
16,000 shares short to 27,000 shares long. Nicolois told Tacopino
during a visit to Nicolois' house that the "good news" was that a
public relations firm would be making a buy recommendation to its
clients. This recommendation was arranged by Maier Lehmann
("Lehmann").*fn9

On January 12, an internet publication called The Future
Superstock released its choice of EOSC as the "Stock Pick of the
Year for 1998." It set a price target of $15 to $18 per share
over the next three months to a year. That prediction assumed a
market capitalization of $378,000,000 for a company that had
received an investment of approximately $1 million from outside
investors and that did not yet have a prototype that Weaver felt
he could show to potential customers. That very day Weaver wrote
an internal memorandum expressing concern about the unwarranted
"hype" of the stock and stating that he would rather not say
anything yet. "We do not have a product that we can show today.
We will in about four months."

In late January, Ari Friedman approached David Pollack
("Pollack"), the president of ADL Data Systems, Inc. ("ADL"),
about the possibility of distributing EOSC's fingerprint
identification units. ADL provides software services to the health care industry. On January 29, Levy faxed Pollack the first
draft of a press release which referred to an ADL purchase order.
Pollack told Levy that this purchase order did not exist and that
he did not intend to execute a blanket purchase order. Pollack
insisted that any commitment to EOSC had to be conditioned on
receiving a working unit that would satisfy him. Levy then faxed
a draft letter detailing a proposed joint venture. Pollack and
Weaver signed the letter, which refers to an attached purchase
order that did not exist. It reads in part:

As per my negotiations with your agent, enclosed
please find our Purchase Order for 1,000 units of
your Fingerprint Identification system. These units
are to be delivered to our office soon after we've
had the opportunity to test your evaluation units and
price will be finalized prior to shipment.

On January 30, EOSC issued a press release that Levy dictated
to EOSC employee George Clarke ("Clarke"). When Clarke learned
that there was no purchase order from ADL he ordered Levy to
remove the reference to a purchase order from the press release.
Levy insisted that investors needed the reference to a purchase
order. Clarke crossed out the word "purchase" on the draft press
release and told Levy that he could issue it. Neither Clarke nor
Weaver saw the final version of the press release until long
after it was issued. It read in part:

[EOSC] a public company, announced today that it
received a Purchase Order from ADL Data Systems,
Inc., a leading system integrator and software
provider to the nursing home and health care
industry, for an initial order of 1,000 Finger Print
Verification Units for an undisclosed price. The
Purchase Order and accompanying Letter of Agreement
state that upon the successful evaluation and testing of these units
initially with selected ADL nursing home clients, ADL
agrees to market additional units in a joint venture
with EOSC to national health care sources. ADL
estimates that the first year of the joint venture
following the test placement could result in the sale
of a minimum of 15,000 units.

(Emphasis supplied.)

Meanwhile, Chachas and Cavanagh discussed the exercise of the
second option. On February 23, 1998, Chachas ordered the transfer
of 150,000 EOSC shares owned by the Curbstone Management Group to
Construcciones. The Construcciones brokerage account at Donald &
Co. received the shares on February 24. This transfer was the
exercise of the second tranche of the option agreement and
required a payment of $4 per share. The $600,000 payment came
from the Construcciones account at Donald & Co. via the Levy &
Levy Trust Account for Milestone ("Trust Account").
Construcciones wired the money to the Trust Account on February
10, 1998, and on that same day the Trust Account posted the
receipt of the $600,000. On February 12, the Trust Account sent
Chachas $600,000.*fn10 An amended Form 8-K was filed by Levy on February 18. EOSC had
fired Levy for failing to correct statements in the December 23
Form 8-K about who had agreed to serve as EOSC Directors. After
Cavanagh threatened EOSC with a loss of financing if it did not
rehire Levy, EOSC rehired him and Levy made the February 18
filing for EOSC. It disclosed for the first time Regulation S
sales to Agira Trading and Optimum Fund and corrected the total
number of shares outstanding to reflect 21,084,818 shares.

Many other deficiencies in the December 23, Form 8-K remained
uncorrected, however, including misstatements about the agreement
of employees to serve as company directors. The February 18
filing continued to portray the merger as a stock for stock
transaction without disclosing the additional terms that gave
control of the float, and therefore the stock price, to Cavanagh,
and Nicolois. It represented that, to the knowledge of EOSC
management, no agreements as to any matters existed among the
former shareholders and any other shareholders of EOSC. Cavanagh,
Nicolois and Levy, each of whom reviewed the draft Form 8-K
before it was filed, knew of the side agreements transferring
stock to Levy and the Spanish Nominees, and the option agreement
with the Curbstone Management Group. The Form 8-K also
represented that 15,488,120 shares of Curbstone stock that were
issued at the time of the acquisition went directly to WTS shareholders. In fact, of this quantity, 500,000 shares went
directly to Levy and over 2 million went directly to Milestone.
An additional 857,081 shares went to Inversora, the Spanish
entity that Cavanagh indicated he had lined up to provide
additional financing for EOSC, although no such financing was
ever actually provided. Finally, the Form 8-K falsely stated that
EOSC "presently expects to initiate its first commercial
shipment" of its product in the third quarter of the year.

By early March, Tacopino had liquidated almost all of the
shares originally received by the Spanish Nominees. He had
succeeded in keeping the share price over $5. After March 11, the
price fell below $3. Cavanagh and Nicolois assured Tacopino that
they would send in buyers to "stabilize the market." At that time
Cavanagh and Nicolois had large blocks of stock at Donald & Co.
in the name of Agira Trading, Invesora and Optimum Fund that were
purportedly issued under Regulation S*fn11 but not yet
liquidated, and the 41 day minimum restriction period for that
Regulation S stock was about to expire.*fn12

On March 6, Cavanagh and Nicolois called Tacopino from Spain
and told him to buy 100,000 shares through the Construcciones Account. Tacopino asked for a written order. Construcciones then
sent a letter authorizing the purchase of 100,000 shares "in the
$5 5/8 to $5 7/8 range." Tacopino made six purchases for a total
amount of 100,000 shares at a price of $549,390. On March 12,
Stieghorst, made two purchases of a total of 20,000 shares.

After the SEC contacted Chachas about EOSC, the four members of
the Curbstone Management Group sold their remaining EOSC shares
on March 11 and 12. On March 13, the TRO was entered and the SEC
issued a stop trading order.

Discussion

The SEC has moved for summary judgment against ten defendants.
One group is composed of Cavanagh and Nicolois, and their
wholly-owned company Milestone, and relief defendants Karen
Cavanagh and Beverly Nicolois, the wives of Cavanagh and
Nicolois, and their company Cromlix. During the discovery period,
each of these four individual defendants invoked his or her Fifth
Amendment privilege against testifying. Cavanagh and Nicolois
have each pleaded guilty to perjury for false statements made
during the early days of this lawsuit. The SEC seeks judgment
against Cavanagh, Nicolois and Milestone for violations of
Section 10(b) of the Exchange Act and Rule 10b-5, and Sections
5(a) and (c), and 17(a) of the Securities Act.

The SEC has moved to preclude these defendants from presenting
evidence in opposition to this summary judgment motion on the ground that they invoked the Fifth Amendment and refused
to be deposed. That motion is addressed before the discussion of
the claims on which the SEC seeks judgment. The issues regarding
all relief defendants is presented towards the end of this
Opinion.

The SEC has also moved for summary judgment against Brooksbank,
Hantges, and Franklin, each of whom was a member of the Curbstone
Management Group. The plaintiff seeks summary judgment on its
Securities Act Sections 5(a) and (c) claims against these
defendants for offering and selling securities without complying
with the registration provisions of the securities laws. Finally,
the SEC moves for summary judgment against relief defendant
Kaufer.*fn13

Summary judgment may not be granted unless the submissions of
the parties taken together "show that there is no genuine issue
as to any material fact and that the moving party is entitled to
a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. The
moving party bears the burden of demonstrating the absence of a
material factual question, and in making this determination the
court must view all facts in the light most favorable to the non-moving party. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 247 (1986); Celotex Corp. v. Catrett,
477 U.S. 317, 323 (1986). "A dispute regarding a material fact is
genuine if the evidence is such that a reasonable jury could
return a verdict for the nonmoving party." Mount Vernon Fire
Ins. Co. v. Belize NY, Inc., 277 F.3d 232, 236 (2d Cir. 2002)
(citation omitted). When the moving party has asserted facts
showing that it is entitled to judgment, the opposing party must
"set forth specific facts showing that there is a genuine issue
for trial," and cannot rest on the "mere allegations or denials"
of his pleadings. Rule 56(e), Fed.R. Civ. P.; accord Burt
Rigid Box, Inc. v. Travelers Property Cas. Corp., 302 F.3d 83,
91 (2d Cir. 2002). While evidence as a whole must be assessed to
determine whether there is a trial-worthy issue, Bickerstaff v.
Vassar College, 196 F.3d 435, 448 (2d Cir. 1999), conclusory
statements are insufficient to defeat a motion for summary
judgment. Opals on Ice Lingerie v. Body Lines, 320 F.3d 362,
370 n. 3 (2d Cir. 2003). In addition, documents and affidavits
submitted to create a factual dispute must be "admissible
themselves or must contain evidence that will be presented in an
admissible form at trial." Santos v. Murdock, 243 F.3d 681, 683
(2d Cir. 2001) (per curiam); see Rule 56(e), Fed.R.Civ.P.
Thus, in determining whether to grant summary judgment, this
Court must (1) determine whether a genuine factual dispute exists
based on the admissible evidence in the record; and (2)
determine, based on the substantive law at issue, whether the fact in dispute is material.

Rule 56.1 of the Local Civil Rules of the United States
District Courts for the Southern and Eastern Districts of New
York ("Local Rule 56.1") "requires a party moving for summary
judgment to submit a statement of the allegedly undisputed facts
on which the moving party relies, together with citation to the
admissible evidence of record supporting each such
fact."*fn14 Giannullo v. City of New York, 322 F.3d 139,
140 (2d Cir. 2003) (emphasis supplied). See also Local
Rule 56.1(a), (d). "[W]here there are no citations or where the cited
materials do not support the factual assertions in the
Statements, the Court is free to disregard the assertion." Holtz
v. Rockefeller & Co., Inc., 258 F.3d 62, 73 (2d Cir. 2001). If
the opposing party fails to controvert a properly supported fact in the moving
party's Rule 56.1 statement, that fact will be deemed
admitted.*fn15 See Local Rule 56.1(c); Giannullo, 322
F.3d at 140.

I. Preclusion Motion

The SEC has moved to preclude Cavanagh, Nicolois, Milestone and
their wives from presenting any evidence in opposition to this
motion for summary judgment (or at trial) on the ground that they
asserted their Fifth Amendment right against self-incrimination
and refused to testify during the discovery period in this
action. Alternatively, the SEC moves to preclude these defendants
and relief defendants from relying on the testimony that Cavanagh
gave in 1998, since he has refused to testify on two subsequent
occasions on the ground that his testimony may incriminate him.
To the extent that these defendants raise issues of fact, they do
so principally through citations to Cavanagh's Hearing testimony.
Finally, the SEC argues that, at the very least, it is entitled to an adverse inference against
any defendant who has invoked the Fifth Amendment privilege.

The Fifth Amendment provides that "no person . . . shall be
compelled in any criminal case to be a witness against himself."
U.S. Const. Amend V. An individual is entitled to invoke the
privilege against self-incrimination during a civil proceeding.
See, e.g., Minnesota v. Murphy, 465 U.S. 420, 426 (1984);
Asherman v. Meachum, 957 F.2d 978, 981 (2d Cir. 2002). The
trier of fact, however, can draw an inference "against a party to
a civil suit that invokes the Fifth Amendment privilege against
self-incrimination." Nabisco, Inc. v. PF Brands, Inc.,
191 F.3d 208, 226 (2d Cir. 1999). See also United States v. U.S.
Currency in the Amount of $119,984.00 More or Less,
304 F.3d 165, 177 (2d Cir. 2002). In addition, a "party who asserts the
privilege against self-incrimination must bear the consequence of
lack of evidence, and the claim of privilege will not prevent
. . . summary judgment if the litigant does not present
sufficient evidence to satisfy the usual evidentiary burdens in
the litigation." United States v. Certain Real Property and
Premises Known As: 4003-4005 5th Ave., Brooklyn, N.Y.,
55 F.3d 78, 83 (2d Cir. 2003) (citation omitted). Nonetheless, because
all parties  those who invoke the Fifth Amendment and their
opponents  should have every reasonable opportunity to litigate
a civil case fully and because the exercise of Fifth Amendment
rights should not be made unnecessarily costly, courts should
further the goal of permitting as much testimony as possible to
be presented in the civil litigation, despite the assertion of privilege, and
balance the rights of all parties to the litigation. Id. at 84.
Courts should "give due consideration to the nature of the
proceeding, how and when the privilege was invoked, and the
potential for harm or prejudice to opposing parties." Id. When
a party who has invoked the privilege seeks to withdraw the claim
of privilege a particularly careful inquiry is required.

Since an assertion of the Fifth Amendment is an
effective way to hinder discovery and provides a
convenient method for obstructing a proceeding, trial
courts must be especially alert to the danger that
the litigant might have invoked the privilege
primarily to abuse, manipulate or gain an unfair
strategic advantage over opposing parties. If it
appears that a litigant has sought to use the Fifth
Amendment to abuse or obstruct the discovery process,
trial courts, to prevent prejudice to opposing
parties, may adopt remedial procedures or impose
sanctions. In such circumstances, particularly if the
litigant's request to waive comes only at the
`eleventh hour' and appears to be part of a
manipulative, `cat-and-mouse approach' to the
litigation, a trial court may be fully entitled, for
example, to bar a litigant from testifying later
about matters previously hidden from discovery
through an invocation of the privilege.

Cavanagh and Nicolois and their wives testified in 1998, in
connection with the Hearing. Specifically, Cavanagh testified at
a deposition and at the Hearing. Nicolois testified as a
non-party at a deposition in May 1998. Their wives were also
deposed in 1998. Thereafter, these individuals invoked their
Fifth Amendment privilege and refused to testify. Cavanagh and
Nicolois refused to provide testimony on September 10, 1998 and
March 8, 1999, respectively. More recently, on October 24, 2003,
Cavanagh and Nicolois again invoked their Fifth Amendment
privilege and refused to answer any questions of substance at
their depositions. Their wives similarly invoked their Fifth
Amendment privilege two days earlier, on October 22. None of
these parties have submitted an affidavit in opposition to
summary judgment or indicated a desire now to submit to depositions.*fn16

As noted above, this civil litigation was stayed for several
years during a criminal investigation. Nicolois, Cavanagh, and
Levy were indicted on February 26, 2003, for sworn statements in
1998 in this action. The indictment recited the following
background facts. A March 13, 1998 TRO issued by this Court, as
amended on March 20, required Cavanagh and Levy to file sworn
accountings. A July 31 amended complaint added Nicolois as a
civil defendant, and through an August 19 Stipulation and Order
he was also required to provide a sworn accounting. Cavanagh's
March 23, 1998 accounting failed to disclose that he was the
beneficial owner of two Swiss bank accounts. Levy's March 20,
1998 accounting failed to disclose his receipt of 95,000 EOSC
shares and $561,000 from the sale of those shares. In his April
14, 1998 amended affidavit, Levy again failed to disclose these
transactions. At his May 26, 1998 deposition, Nicolois denied
knowing of any foreign accounts held by Cavanagh even though
Nicolois had signed bank documents granting him a power of
attorney over one of Cavanagh's Swiss bank accounts. The seven
count indictment charged the defendants with violations of
18 U.S.C. § 1621 and 1503.

On December 11, 2003, Cavanagh and Nicolois each pleaded guilty to one count of perjury pursuant to a plea agreement with
the Government that calculated their sentencing guidelines range
as six to twelve months. Cavanagh admitted that he knowingly
executed and swore to a false financial statement that omitted
the fact that he had signatory rights on a Swiss bank account.
Nicolois admitted knowingly testifying falsely under oath in May
of 1998 that he did not know that Cavanagh had signatory rights
over a Swiss bank account.

On March 11, 2004, the Honorable Shira Scheindlin sentenced
each defendant principally to two years of probation with six
months of home detention as a special condition. The Court
rejected the defendants' requests to forego a fine. She imposed
fines of $10,000 on Cavanagh and $5,000 on Nicolois to impress
upon them the seriousness of their offense and to serve as a
warning should they be tempted again to engage in criminal
conduct.

The SEC's motion to preclude these defendants and relief
defendants from offering any evidence in opposition to summary
judgment must be denied. To the extent that these defendants have
pointed to any evidence that would be admissible at trial it
shall be considered.

The SEC's motion to preclude these defendants and relief
defendants from relying on Cavanagh's Hearing testimony, however,
must be granted. Summary judgment practice is intended to
identify whether there are disputed issues of fact created by admissible evidence that require a trial. Cavanagh's Hearing
testimony is, of course, inadmissible unless offered at trial by
a party opponent. There is no evidence that Cavanagh himself will
testify at trial, and the SEC would be able to show substantial
prejudice if he attempted to do so. Cavanagh has refused since
September 1998 to be deposed in this action. During much of this
time he was the target of or a defendant in a criminal
proceeding. At no point since that prosecution ended, however,
has Cavanagh sought to reopen discovery and to submit to a
deposition. He does not make that offer in opposition to the
SEC's motion to preclude and has not submitted his own affidavit
in opposition to summary judgment.*fn17 He has, therefore,
not established that he would in fact testify at trial and has
deprived the SEC of an opportunity to depose him in advance of
trial.

II. Section 5

The SEC has moved for summary judgment against Cavanagh,
Nicolois, Milestone, Franklin, Brooksbank and Hantges for a
violation of Sections 5(a) and (c) of the Securities Act. All of
these defendants except Hantges resist a finding of liability. Section 5(a) provides in pertinent part

(a) Unless a registration statement is in effect as
to a security, it shall be unlawful for any person,
directly or indirectly 

(1) . . . to sell such security through the use or
medium of any prospectus or otherwise; or

(2) to carry or cause to be carried . . . any such
security for the purpose of sale or for delivery
after sale.

15 U.S.C. § 77e(a). Section 5(c) makes it unlawful for any
person, "directly or indirectly," by means of interstate
commerce, "to offer to sell" a security "unless a registration
statement has been filed as to such security. . . ."
15 U.S.C. § 77e(c). See also Demaria v. Andersen, 318 F.3d 170, 173 (2d
Cir. 2003). A sale includes "every contract of sale or
disposition of a security or interest in a security, for value."
15 U.S.C. § 77b(a)(3). An offer to sell securities includes
"every attempt or offer to dispose of, or solicitation of an
offer to buy, a security or interest in a security, for value."
Id.

The purpose of the registration requirement, and of the
Securities Act as a whole, is to "protect investors by promoting
full disclosure of information thought necessary to informed
investment decisions." SEC v. Ralston Purina Co., 346 U.S. 119,
124 (1953). Section 5 requires issuers of securities to disclose,
among other things, information about the issuer's financial
condition, the identity and background of management, and the
price and amount of securities to be offered. 15 U.S.C. § 77g,
77aa. To establish a prima facie violation of Section 5, the SEC must
prove three elements: (1) that no registration statement was in
effect for the securities; (2) that the defendant directly or
indirectly sold or offered to sell the securities; and (3) that
interstate means were used in connection with the offer or sale.
Europe and Overseas Commodity Traders v. Banque Paribas London,
147 F.3d 118, 124 n. 4 (2d Cir. 1998). A registration statement
is transaction specific. "Each sale of a security . . . must
either be made pursuant to a registration statement or fall under
a registration exemption." Cavanagh, 155 F.3d at 133 (citation
omitted). Registration statements are "filed for offerings and
not for securities." Id. To prove a violation of Section 5, a
plaintiff need not establish scienter. See Pinter v. Dahl,
486 U.S. 621, 638 (1988) (strict liability for a Securities Act
Section 12 claim); SEC v. Universal Major Indus.,
546 F.2d 1044, 1047 (2d Cir. 1976) (addressing equitable relief sought
against an aider and abetter). See also In re WorldCom, Inc.
Sec. Litig., 294 F. Supp.2d 431, 441-43 (S.D.N.Y. 2003) (strict
liability for Securities Act Section 11 claim). If the SEC has
made out a prima facie case of a violation, the defendant bears
the burden of showing that the securities transactions at issue
fall within one of the enumerated exemptions from registration.
Ralston Purina Co., 346 U.S. at 126; Cavanagh, 155 F.3d at
133.

The SEC has presented evidence to establish that each of these
defendants violated Section 5. They have shown that no
registration statement was filed for the sales of stock by the Curbstone Management Group that are the focus of the Section 5
claims, including sales to the Spanish Nominees and sales through
the option agreement.

The SEC has shown that Chachas, on behalf of Franklin,
Brooksbank, Hantges and himself, negotiated from December 1 to
12, 1997, with Levy, on behalf of Cavanagh, Nicolois, and
Milestone, to sell almost all of their ownership interest in
Curbstone. The Curbstone Management Group sold stock to the
Spanish Nominees in December 1997, sold other stock through the
option agreement in December and early 1998, and sold their own
EOSC shares to the public in March 1998. Cavanagh, Nicolois and
Milestone were, at a minimum, indirect sellers of EOSC stock.
Through Levy's negotiations they arranged for the sale of the
Curbstone shares to the Spanish Nominees and the resale of those,
shares to the public. They arranged for a market maker for EOSC
stock, set up the brokerage accounts to liquidate the EOSC stock,
and oversaw the sale of that stock through a dozen Donald & Co.
brokerage accounts.

A. Cavanagh, Nicolois, U.S. Milestone

Cavanagh, Nicolois and Milestone do not claim that there was
any exemption under the law that would have eliminated the need
to file a registration statement. Cavanagh, Nicolois, their wives
and Milestone contend, however, that there are material, disputed
issues of fact regarding three issues: (1) whether a registration statement was in effect; (2) whether Cavanagh,
Nicolois or Milestone sold or offered to sell securities as to
which no valid registration statement was effective; and (3)
whether Cavanagh and Nicolois were entitled to rely on the advice
from their counsel, Levy, that a valid registration statement
covering the transfers of EOSC securities was in effect or that a
legitimate exemption was available. As to the first issue, the
defendants have not pointed to any evidence to suggest that a
registration statement for these sales was in effect. As the
Second Circuit has emphasized in this very litigation, the
registration requirement is transaction specific. Cavanagh, 155
F.3d at 133. As to the last  the advice of counsel defense 
that defense provides no protection against a violation of a
strict liability statute like Section 5. The factual basis for
this asserted defense is addressed infra, in connection with
the Section 10(b) claim.

In their Local Civil Rule 56.1 Statement, these defendants
appear to contest several facts upon which the SEC relies to show
that they were deeply involved in the sale and distribution of
shares for which there was no registration statement. When their
citations to record evidence are examined, however, in every
instance but one, their citations do not relate to the facts they
assert are in dispute.*fn18 As significantly, in every
instance but those discussed below in connection with an advice of counsel
defense, their only citation is to prior testimony given by
Cavanagh at the Hearing. For the reasons already explained, the
defendants may not rely on Cavanagh's Hearing testimony to raise
a disputed issue of fact.

It should be noted, however, that even if the defendants could
rely on Cavanagh's Hearing testimony, it raises a dispute
regarding only a single fact. Cavanagh admitted at the Hearing
that he placed an order for a purchase of EOSC stock on December
19 with a broker named Proudian at Alexander Westcott. He
asserted, however, that the order had an upper limit of $7, and
was not an order with a fixed price of $7. The SEC has relied on
the contemporaneous account records and the testimony of two brokers to assert that Cavanagh placed a fixed price order at $7.
Even if it were appropriate to consider Cavanagh's testimony,
this single factual dispute, given the abundance of evidence on
which the SEC has relied, does not create a material issue of
fact with respect to any element of any of the claims with which
the defendants are charged.

B. Brooksbank and Franklin

Brooksbank and Franklin resist summary judgment principally by
arguing that one or more of three exemptions to registration
protect them from liability under Section 5. They have submitted
affidavits which to a large extent are not based on personal
knowledge. The SEC's motion to strike portions of their
affidavits, and portions of Brooksbank's Rule 56.1 Statement are
addressed before turning to the issue of whether they have raised
questions of fact that require a trial on the three asserted
exemptions from registration.

1. Brooksbank's Affidavit and Rule 56.1 Statement

The SEC has moved to strike those portions of the Brooksbank
affidavit and Rule 56.1 Statement that are not based on personal
knowledge or otherwise admissible evidence. Brooksbank's
affidavit in opposition to the summary judgment motion contains
very little information based upon first hand knowledge or
otherwise admissible evidence. For example, Brooksbank recites in considerable detail conversations between Levy and Chachas. He
does not assert that he has any first hand knowledge of those
conversations. He denied in his testimony in 1998 that he had any
recollection of the contents of the few conversations with Levy
in which he participated, and continues to this day to assert
that he had no role in the negotiations for the sale of the
Curbstone stock and depended entirely on Chachas. In his 1998
testimony Brooksbank also denied any knowledge of the substance
of the negotiations.

With few exceptions, Brooksbank has not presented any
admissible evidence that raises a question of fact regarding his
liability under Section 5. A summary of his more fact-based
contentions is included here. As this summary illustrates, these
contentions are largely irrelevant to the issue of his liability
under Section 5.

Brooksbank accepts that a serious fraud and manipulation was
perpetrated, but blames Levy, Cavanagh and Nicolois. Brooksbank
principally argues that, as an attorney, he provided substantial,
uncompensated legal work on behalf of Curbstone that entitled him
to the money and stock he received through the sale of the
Curbstone Management Shares; that he is responsible for bringing
Chachas to Curbstone and relied upon him as a securities law
expert; that in particular he relied upon Chachas when Chachas
represented to him the Curbstone sale was legal and exempt from the Section 5 registration requirements;*fn19 that Chachas
negotiated the transaction on behalf of Curbstone and that the
other three members of the Curbstone Management Group were not
involved in the negotiations, execution or delivery of the
Purchase Agreements; that the Curbstone December Form 8-K was
prepared by Levy and that Chachas's role was to submit it to the
SEC through its EDGAR system; that Brooksbank was no longer an
affiliate of Curbstone/EOSC when he sold his shares; that
Brooksbank's shares were sold to Construcciones and Tacopino's
early liquidation of Spanish Nominee shares was from the
Cambiarios account; that while Cavanagh and Nicolois had
significant influence over the market float, it remains a
disputed issue of fact whether they controlled the Spanish
Nominees.*fn20

The only factual assertions with potential relevance to the Section 5 claim are the asserted reliance on Chachas'
representations about the exemption from registration and the
assertion that Brooksbank was no longer an affiliate when the
Curbstone shares were sold. The later assertion is addressed in
connection with the discussion of the Section 4(1) exemption,
infra.

The law concerning a defendant's reliance on advice of counsel
is set forth below in connection with the defenses that Cavanagh
and Nicolois interpose to the securities fraud charges. Since a
Section 5 claim is a strict liability claim, Brooksbank's
scienter is not at issue and his assertion of Chachas' advice
does not raise a question of fact requiring a trial.

2. Franklin's Affidavit

The SEC moves to strike those portions of Franklin's affidavit
that are not based on personal knowledge. In his affidavit
Franklin describes himself as a former stockbroker who worked
from 1994 to 2000 as president of an IPO consulting firm in an
effort to obtain financing for small companies. In 1996, Franklin
agreed to work with Chachas on Curbstone and invested
approximately $5,000 in the company. Franklin's job was to find a
company to buy Curbstone. Franklin became a member of the
Curbstone Board of Directors, and then in the summer of 1997
resigned when Chachas requested him to do so. Franklin gave all
of his shares to Chachas, along with a power of attorney. Franklin participated in none of the negotiations regarding the
WTS transaction. Chachas told Franklin that he was the attorney,
"let me worry about the legal matters."

Franklin admits that there was a massive fraud, but contends
that he assumed that all of the transactions in which he was
involved were legal. He represents that any violation of the law
on his part was through inadvertence, and not because of any
unlawful intent.

Beyond this description of his involvement with Curbstone and
his state of mind, Franklin has also incorporated into his
affidavit a description of events based on his review of
materials produced during this litigation. As was true in
connection with Brooksbank's affidavit, those portions of the
affidavit that do not reflect events in which he participated are
treated only as argument and have been considered to the extent
that they identify admissible evidence to support their
assertions of fact.

3. Brooksbank, Franklin: The Exemptions to Registration

Two of the three members of the Curbstone Management Group 
Brooksbank and Franklin  resist summary judgment by asserting
that there are exemptions from registration that apply to their
transactions.*fn21 Their submissions do not create any
material issue of fact to support their contention that these exemptions
prevent a finding of liability against them under Section 5. The
three exemptions on which they rely are Section 4(1), putative
Section 4(1)½, and Regulation S. The first two of these purported
exemptions were considered at the Hearing and rejected.

Section 4(1) Exemption

Section 4(1) of the Securities Act exempts from registration
those transactions conducted by someone other than an "issuer,
underwriter or dealer." 15 U.S.C. § 77d(1). The purpose of this
exemption is to allow free trading among individual investors of
securities that have already been registered. SEC v. Culpepper,
270 F.2d 241, 247 (2d Cir. 1959).

The securities laws define an issuer, with exceptions that have
no relevance here, as "every person who issues or proposes to
issue any security." 15 U.S.C. § 77b(a)(4). An issuer includes
"any person directly or indirectly controlling or controlled by
the issuer, or any person under direct or indirect common control
of the issuer." 15 U.S.C. § 77b(a) (11). "A control person, such
as an officer, director, or controlling shareholder, is an
affiliate of an issuer and is treated as an issuer when there is a distribution of securities." Cavanagh,
155 F.3d at 134.

The term "affiliate" is defined in Rule 144 of the securities
regulations as "a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is
under common control with, such issuer." 17 C.F.R. § 230.144(a)
(1).*fn22 A person is not an "affiliate" for the purposes of
Section 5 and Section 4(1), however, if at the time he sold the
corporation's shares he had not been an "affiliate" of the issuer
for the preceding three months. See
17 C.F.R. § 177.144(k);*fn23 United States v. Sprecher, 988 F.2d 318,
319 (2d Cir. 1993). Ordinarily, an affiliate may not rely on a Section
4(1) exemption. Cavanagh, 155 F.3d at 134.

Under the doctrine of integration, the merger of Curbstone with
WTS and the sales to the Spanish Nominees are treated as one.
Cavanagh, 1 F. Supp.2d at 364. See also Geiger v. SEC,
363 F.3d 481, 487 (D.C. Cir. 2004) (defendant did not have to be
involved in the final step of the distribution to be considered a
seller for Section 5 purposes); Universal Major Indus., 546
F.2d at 1047; SEC v. Lybrand, 200 F. Supp.2d 384, 396
(S.D.N.Y. 2002) (finding the sales and transfer at issue were a
single transaction for each entity, and that defendants were
affiliates of the issuer even after they resigned as officers and
directors and transferred a majority of shares).

Neither Brooksbank nor Franklin has raised an issue of fact to
show an entitlement to rely on the Section 4(1) exemption at
trial. Each member of the Curbstone Management Group was an
issuer. Each member owned approximately one-quarter of Curbstone
and agreed that Chachas could offer to sell and sell their stock
as a block.*fn24 Brooksbank, along with Chachas, was an
officer and director of Curbstone. Franklin's resignation from the Curbstone
Board of Directors in the summer of 1997 does not alter this
analysis or raise a question of fact regarding his status as an
affiliate in December 1997.

Brooksbank and Franklin assert that Weaver took control of
Curbstone before December 18, 1997, and that they were no longer
affiliates of the company on that date.*fn25 In particular,
they assert that they were not affiliates at the precise point on
December 18 when the shares issued to the Spanish Nominees
pursuant to the Purchase Agreements and when the shares they sold
as Milestone exercised the first option were shipped by the
transfer agent to Levy.*fn26 They emphasize that the
Exchange Agreement which effected the merger is dated December 5.

Offers for sale of unregistered securities are as prohibited as
sales. It is undisputed that the defendants offered their stock
for sale while affiliates. The defendants also have not raised an
issue of fact as to whether the merger and these stock sales
should not be treated as an integrated transaction. These sales
of shares, the remainder of the sales of under the option
agreement, and the lock-up agreement, were material parts of the
consideration for the reverse acquisition. Since this was an integrated transaction, it is irrelevant to resolve on what
precise day control passed from the Curbstone Management Group to
Weaver. In any event, under SEC regulations, Brooksbank and
Franklin would have retained their affiliate status for three
months after control passed. See 17 C.F.R. § 230.144(k).

Brooksbank and Franklin argue in a similar vein that their
February 1998 sales through the exercise of the second option,
and their own March 1998 sales of EOSC shares to the public are
exempt because they were no longer affiliates of EOSC. As noted,
the option agreement and the lock-up agreement were negotiated in
December and were integral parts of the agreement pursuant to
which the Curbstone Management Group sold its shares. They were
part of the integrated transaction and cannot be excised from it.
When the substance of the transactions are examined, as they must
be, none of the facts to which the defendants point are material.

Brooksbank argues that Allison v. Ticor Title Ins. Co.,
907 F.2d 645 (7th Cir. 1990), requires a different result. It
does not. Allison observed that each sale of a security must be
lawful and that a prior illegal sale will not taint a future sale
if an exemption from registration is available for that sale.
Id. at 648. This unremarkable proposition gives no comfort to
Brooksbank unless he can identify an exemption from registration
for his sales. The Purported Section 4(1)½ Exemption

In connection with the sale of their shares to the Spanish
Nominees, Brooksbank and Franklin rely on an implied exemption to
registration which is referred to as the Section 4(1)½ exemption
because it falls between the cracks of the Sections 4(1) and 4(2)
exemptions, which allow, respectively, for private sales among
persons who are not issuers, underwriters, or dealers, and for
private sales by an issuer. The Section 4(1)½ exemption is said
to allow affiliates to sell substantial amounts of their stock to
private investors without registration. See Cavanagh,
1 F. Supp.2d at 368. As is the case for an issuer claiming an
exception for a private sale under Section 4(2), an affiliate
claiming a Section 4(1)½ exemption has the burden of establishing
that such sales do not constitute a disguised public
distribution. See id. at 368-69.

Although the SEC has never articulated exactly what steps an
issuer or affiliate must take to fall within the private
placement exemption under Section 4(2), the elicitation of bare
representations that the buyer does not have any present
agreement to resell is plainly insufficient. As the SEC has
advised,

An issuer may not establish a claim to an exemption
under Section 4(1) [now 4(2)] merely by collecting
so-called "investment representations" from a limited
group of purchasers if in fact a distribution by such
persons occurs. Counsel and their issuer and
underwriter clients cannot base a claim to
exemption from registration under the Securities Act
upon the mere acceptance at face value of
representations by purchasers that they take for investment and
disclaim responsibility for investigation and
consideration of all relevant facts and circumstances
pertinent to a determination that the transactions do
not involve a public offering.

Securities Act Release No. 3825, 1957 WL 7724, at *5 (SEC Aug.
12, 1957) (emphasis added). Even assuming that the law recognizes
an implied exemption under purported Section 4(1)½ the defendants
have not shown that there exists a question of fact as to whether
their sales to the Spanish Nominees was a qualified private
distribution.*fn27

The undisputed evidence is that the Spanish Nominees were
formed for the purpose of buying United States securities just
weeks before the closing of the transaction, and took steps to
resell and transfer their shares into the American market as soon
as they received the shares. Cavanagh and Nicolois opened
brokerage accounts at Donald & Co. in order to liquidate those
shares as Levy and Chachas were negotiating the sale of
Curbstone. Tacopino began selling the EOSC stock, through short
sales, as soon as the sale of Curbstone closed and before the
accounts opened in the names of the Spanish Nominees had even
received the EOSC shares. Cavanagh and Nicolois directed
Tacopino's sales of the shares from the Spanish Nominees' accounts. The Curbstone Management Group's cooperation with this
scheme was critical. The Group provided "free trading" Curbstone
stock, that is, stock that was free of any restrictive legends.
No member of the Group performed any due diligence as to the
identity of the Spanish Nominees or their investment objectives.

Brooksbank and Franklin rely on a representation in the
Purchase Agreements that covered the sale of the 2.5 million
shares to the Spanish Nominees to raise a question of fact as to
whether they could have reasonably understood that this was a
private distribution and that there would be no sales to the
public. The agreement with the Spanish Nominees contained the
following representation: "The Purchaser is investing solely for
its own account and has no present agreements to transfer rights
to this subscription Agreement or to the Shares to any other
person." This representation is insufficient to raise a question
of fact about whether the sale was reasonably understood to be
sale of shares that would not be resold to the American public.
These defendants have not presented sufficient facts to show that
they conducted any investigation which would have permitted them
to rely reasonably upon this limited representation.

Brooksbank relies on Chachas' testimony at the Hearing to the
effect that he believed that he was dealing with sophisticated
investors who did not have a present intention to distribute
shares. Without evidence of any investigation to provide a
reasonable basis for that asserted belief, this assertion is
insufficient to raise a question of fact requiring a trial.*fn28

Brooksbank and Franklin assert that they sold their stock in
December to Construcciones, and that it resold its stock for the
first time in February, or forty-nine days after "enormous
changes" had occurred.*fn29 The enormous changes are
apparently the rise in the price of the stock manipulated by
Cavanagh and Nicolois. Brooksbank and Franklin argue that this is
compelling evidence that Construcciones did not intend to resell
the stock immediately, and that the purchase was made for
purposes of investment rather than resale, and thus qualifies for
a Section 4(1)½ exemption.

Even assuming that the flow of paperwork demonstrates that
Brooksbank's or Franklin's individual Curbstone shares went to
Construcciones,*fn30 that does not raise an issue of fact
regarding Construcciones intent or the applicability of an
implied Section 4(1)½ exemption. Again, the undisputed evidence
requires the resale of the Spanish Nominees' shares into the
public markets to be viewed as a single controlled stream of
sales that ran from December on. There is no evidence that anyone made the decision
about when and from which particular account to sell these shares
except Cavanagh and Nicolois and that they controlled through
Tacopino the timing of the liquidation of the Spanish Nominees'
shares so that sales were made from December through March at a
rate which would preserve a market price over $5 and yet
liquidate the accounts as quickly as possible. Thus, the fact
that the Construcciones' shares were not sold first is not a
sufficient basis to find that the sale to one of the three
nominees should be segregated from the sales to the other
nominees such that it is entitled to an exemption from
registration requirements.

In a similar vein, Franklin argues that what is at issue is the
purchaser's intent at the time of purchase, and that that intent
may change legitimately over time. Franklin asserts that an
investment intent can be found where the purchaser holds for a
market rise, like that which occurred here. Franklin has not
pointed, however, to any admissible evidence that would entitle a
jury to find that there was an intent by the Spanish Nominees at
the time they purchased shares to hold them for investment.

Franklin relies on Ralston Purina Co., 346 U.S. 119. Ralston
Purina Co. held that the defendant's offerings of stock to its
employees should have been registered because it did not fall
into the "private offering" exception to the registration requirement contained in Section 4(1).*fn31 In so holding,
the Court stated that application of the private offering
exemption "should turn on whether the particular class of persons
affected need the protection of the Act." Id. at 125. Franklin
argues that the entities that received the securities at issue
were created or completely controlled by Levy, and did not have
the need for the information which would have been provided in a
registration statement. As the undisputed evidence shows,
however, the unrestricted stock sold to the Spanish Nominees was
funneled immediately and directly to the public. In any event, no
party has provided evidence of precisely who the Spanish Nominees
were or what they knew. Franklin has not raised a question of
fact that would permit him to argue to the jury that a Section
4(1)½ exemption applies here.

Regulation S

Finally, Brooksbank and Franklin argue that the sale of their
stock to the Spanish Nominees is exempt from registration under
Regulation S. Regulation S, adopted in SEC Release No. 33-6863
(April 24, 1990),*fn32 is a non-statutory exemption for
securities offered and sold outside the United States from the registration requirements under Section 5 of the Securities Act.
17 C.F.R. § 230.901.*fn33 In order to qualify under
Regulation S, "both the sale and the offer pursuant to which it
was made must be outside the United States." Banque Paribas
London, 147 F.3d at 124 n. 5 (citing Offshore Offers & Sales,
Securities Act Release No. 6863, 1990 WL 311658 (S.E.C. Apr. 24,
1990)). If two "safe harbor" exemptions within Regulation S are
met, the offer and resale of securities are deemed to take place
outside the United States for the purpose of Section 5. See
id.; 17 C.F.R. § 903 (issuers); 17 C.F.R. § 230.904 (sellers).
Regulation S, however, "does not apply to transactions that,
though in technical compliance, are designed to evade the
registration requirement." Geiger, 363 F.3d at 488.

To qualify as a safe harbor for offers or sales by an
affiliate, the offer or sale must be made in an offshore
transaction, 17 C.F.R. § 230.903(a); the issuer may make no
effort to sell the securities that are directed to persons in the
United States, id. at .903(b); all offering materials must
include appropriate offering restrictions, including the
prohibition against selling the securities in the United States
unless they are registered or there is an applicable exemption from registration, id. at 903(c) (iv) (D) and
17 C.F.R. § 230.902(h); and the offers or sales cannot be made to or for the
benefit of United States persons before 40 days from the date of
the transaction, 17 C.F.R. § 230.903(c)(2) (iii).

Brooksbank and Franklin have not raised a material issue of
fact regarding the application of Regulation S to these
transactions. It is of course undisputed that each of the sales
at issue here was a domestic transaction and for the benefit of
United States persons. The Purchase Agreements and other
documents created in connection with the sale of the Curbstone
stock to the Spanish Nominees contained no restrictions. There
was no statement that the Curbstone/EOSC stock was subject to
Regulation S and its restrictions. To the contrary, the documents
reflected that it was "free trading." Chachas instructed the
transfer agent for the Curbstone Management Group to issue the
shares "without legend." The stock went from an American transfer
agent into an American brokerage account and from there to the
public.

Brooksbank contends that his sale to Construcciones was "very
consistent" with Regulation S since it was a sale to a Spanish
company and Constucciones held the stock for at least forty days.
For the reasons already explained in connection with the Section
4(1)1/2 exemption argument, Brooksbank has not pointed to any
evidence that would permit a jury to find that Construcciones,
unlike the other two nominees, bought with the intention of
holding its shares offshore and for investment purposes.

III. Sections 10(b) and 17(a)

The SEC moves for summary judgment on two fraud claims brought
under, Section 17(a) of the Securities Act and Section 10(b) of
the Exchange Act against Nicolois, Cavanagh and Milestone. The
SEC contends that defendants Cavanagh, Nicolois and Milestone
participated, along with Levy and Tacopino, in a scheme to
manipulate the price of EOSC stock during late 1997 and early
1998.

Section 17(a) provides that

It shall be unlawful for any person in the offer or
sale of any securities . . . by the use of any means
or instruments of transportation or communication in
interstate commerce or by use of the mails, directly
or indirectly 

(1) to employ any device, scheme, or artifice to
defraud, or

(2) to obtain money or property by means of any
untrue statement of a material fact or any omission
to state a material fact necessary in order to make
the statements made, in light of the circumstances
under which they were made, not misleading; or

(3) to engage in any transaction, practice, or course
of business which operates or would operate as a
fraud or deceit upon the purchaser.

15 U.S.C. § 77q(a). Section 10(b) provides, in pertinent part,
that:

It shall be unlawful for any person, directly or
indirectly, by the use of any means or
instrumentality of interstate commerce or of the
mails, or of any facility of any national securities
exchange  . . .

(b) To use or employ, in connection with the purchase
or sale of any security registered on a national securities exchange or any security not so
registered, . . . any manipulative or deceptive
device or contrivance in contravention of such rules
and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or
for the protection of investors.

Stock market manipulation is the "intentional or willful
conduct designed to deceive or defraud investors by controlling
or artificially affecting the price of securities." Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 199 (1976). "The gravamen of
manipulation is deception of investors into believing that prices
at which they purchase and sell securities are determined by the
natural interplay of supply and demand, not rigged by
manipulators." Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir.
1999). To prove its claims under Sections 10(b) and 17(a)(1),
the SEC must show: (1) that defendants, using the
instrumentalities of interstate commerce, engaged in conduct
designed to deceive, or to defraud investors, and (2) that defendants acted with scienter. Aaron v. SEC, 446 U.S. 680,
691, 697 (1980); Sante Fe Indus., Inc. v. Green, 430 U.S. 462,
476 (1977); Ernst, 425 U.S. at 199; Cavanagh, 1 F. Supp.2d
at 376-77. In addition, a plaintiff must show that "[s]cienter,
as used in the securities fraud statutes, means intent to
deceive, manipulate, or defraud, or at least knowing misconduct."
SEC v. First Jersey, 101 F.3d 1450, 1467 (2d Cir. 1996)
(citation omitted). The SEC is not required to establish
scienter, however, under Sections 17(a)(2) and (3). Aaron, 446
U.S. at 696-97; First Jersey, 101 F.3d at 1467.

The SEC has shown through undisputed evidence that Cavanagh,
Nicolois and Milsetone engaged in a classic market manipulation.
They and their agents merged a shell company with a small and not
yet successful operating company, sold stock bearing no
restrictive legend in an unregistered transaction, took control
of virtually the entire market float, created a false impression
of interest in the stock, filed an untimely, incomplete and
misleading registration statement, issued a false press release,
and drove the stock price north of $5 in a "pump and dump" scheme
from which they and their associates pocketed millions of
dollars. They understood that the prices they created in the
market reflected a market capitalization for the EOSC stock that
was completely unjustified at that point in the company's
history. A. Disputed Issues of Fact

Cavanagh, Nicolois and Milestone oppose summary judgment on
these fraud claims. They contend that there are material,
disputed issues of fact regarding whether they engaged in a
manipulative scheme, whether they acted with the requisite
scienter, and whether they were entitled to rely on advice of
counsel. As was true in the case of the Section 5 claim, however,
they have failed to present sufficient evidence to raise any
material issue of fact that would require a trial.

In addition to the facts that they attempt to dispute which are
described above in connection with the Section 5 claim, these
defendants dispute only three additional facts. They rely
entirely on Hearing testimony from Cavanagh, which as explained
above, his more recent invocation of the Fifth Amendment prevents
them from doing.

For instance, they dispute that at the time of the Future
Superstock story that EOSC did not have a usable prototype to
show to potential customers. With regard to the prototype,
Cavanagh testified at the Hearing that he saw a demonstration of
the WTS technology in July 1997, and that the machine worked
"perfectly." The SEC relies on testimony from Weaver, the
president of WTS/EOSC, for the assertion that EOSC did not yet
have a usable prototype to show to potential customers. As
already discussed, this testimony is not directly in conflict. It
is undisputed that WTS considered itself to be in the development stage when it entered discussions with Cavanagh and
needed money to complete that work so to that it could present a
prototype to potential customers. Cavanagh has offered no
evidence that WTS/EOSC had demonstrated its product to any
potential customer as of the time of the Future Superstock story
or considered itself ready to do so.*fn35

Cavanagh denies that he pressured EOSC to issue the press
release. The passage of his Hearing testimony on which Cavanagh
relies does not address that issue.*fn36 The SEC has relied
on testimony from EOSC's Clarke.

Finally, Cavanagh denies that he threatened Weaver in order to
make him rehire Levy. Again, the passage of his Hearing testimony
on which Cavanagh relies does not address the issue.*fn37
The SEC has submitted evidence from Weaver, among others, on this
point.

Even if it were appropriate to consider Cavanagh's testimony,
and even if it did raise a question of fact on these three
issues, it would make no difference. The defendants have not
raised issues of fact that are material to the SEC's undisputed
evidence of their market manipulation. B. Reliance on Advice of Counsel

Cavanagh, Nicolois and Milestone principally assert that they
relied entirely on Levy for legal advice "in connection with all
relevant transactions." To establish a reliance on the advice of
counsel defense, a defendant "has to show that he made complete
disclosure to counsel, sought advice as to the legality of his
conduct, received advice that his conduct was legal, and relied
on that advice in good faith." Markowski v. SEC, 34 F.3d 99,
105 (2d Cir. 1994). See also United States v. Evangelista,
122 F.3d 112, 117 (2d Cir. 1997). Even if these elements were
satisfied, "reliance is not a complete defense, but only one
factor for consideration." Markowski, 34 F.3d at 105. A defense
of reliance on advice of counsel is available only to the extent
that it might show that a defendant lacked the requisite specific
intent. Stichting Ter Behartiging Van De Belangen Van
Oudaandeelhouders In Het Kapitaal Van Saybolt International B.V.
v. Schreiber, 327 F.3d 173, 183 (2d Cir. 2003); Int'l Star
Class Yacht Racing Ass'n v. Tommy Hilfiger, U.S.A., Inc.,
80 F.3d 749, 754 (2d Cir. 1996).

Cavanagh, Nicolois and Milestone rely on prior testimony given
by Levy, who died on September 26, 2003, and by Cavanagh at the
Hearing to support their advice of counsel defense.*fn38 For
the reasons already described, they cannot rely on Cavanagh's testimony.*fn39 The passages in Levy's Hearing testimony on
which the defendants' rely do not reflect that Cavanagh or
Nicolois asked Levy for legal advice or that he gave them any on
the many issues related to the SEC's evidence of a market
manipulation.*fn40 None of this proffered evidence addresses
the manipulation of a market price in EOSC stock before there was
a public announcement of the merger, or the control of the market
float, or the liquidation of the shares sold to the Spanish
Nominees. Levy's prior testimony is inadequate to raise a
question of fact that the defendants may be entitled to rely on a
good faith defense to the fraud claims. IV. Remedies

The SEC has moved for a permanent injunction against Cavanagh,
Nicolois, and Milestone from violating Section 10(b), Rule 10b-5,
Section 17(a), and Section 5; and against Brooksbank, Hantges,
and Franklin from violating Section 5. The SEC also seeks
disgorgement of the total amount of market fraud  $15,564,863.02
 plus interest from Cavanagh, Nicolois, and Milestone, less any
disgorgement amounts actually paid by other defendants and relief
defendants. From the remaining defendants against whom this
motion is brought, the SEC seeks disgorgement of the amounts they
personally received, and in the case of the members of the
Curbstone Management Group, the amount received by the entire
group.*fn41 Lastly, the SEC asks that Cavanagh, Nicolois,
and Milestone be required to pay the maximum civil penalty under
Section 21(d)(3) of the Exchange Act ("Section 21(d)(3)") and
Section 20(d) of the Securities Act ("Section 20(d)"), and that
Brooksbank, Hantges, and Franklin each be required to pay under Section 20(d) a civil penalty of at least
$125,000 to $175,000. 15 U.S.C. § 78u(d)(3) & 77t(d).

While Cavanagh, Nicolois, and Milestone contest liability, they
have not disputed that the requested injunctions, disgorgement,
and civil penalties are appropriate. Brooksbank, Hantges, and
Franklin, however, resist the permanent injunction, and
Brooksbank and Hantges contest the SEC's request for disgorgement
and civil penalties.*fn42

1. Permanent Injunction

"Injunctive relief is expressly authorized by Congress to
proscribe future violations of federal securities laws."
Cavanagh, 155 F.3d at 135. See 15 U.S.C. § 78u(d). In order
to obtain a permanent injunction, the SEC must show that there is
a "substantial likelihood of future violations of illegal
securities conduct." Cavanagh, 155 F.3d at 135. In making this
determination, a court should look to:

the fact that the defendant has been found liable for
illegal conduct; the degree of scienter involved;
whether the infraction is an `isolated occurrence;'
whether defendant continues to maintain that his past
conduct was blameless; and whether, because of his
professional occupation, the defendant might be in a
position where future violations could be
anticipated.

Id. (citation omitted). See also SEC v. McNulty,
137 F.3d 732, 741 (2d Cir. 1998) (affirming injunction based in part on defendant's efforts "shift responsibility to others" and
"persistent denial" of any wrongdoing). In analyzing whether a
defendant has a propensity for future violations, courts should
look to the "totality of the circumstances." SEC v. Lorin,
76 F.3d 458, 461 (2d Cir. 1996) (citation omitted). In particular,
"the commission of past illegal conduct is highly suggestive of
the likelihood of future violations. . . . [P]ast violations may
in certain circumstances justify an inference that a defendant is
likely to violate the law in the future if not enjoined." SEC v.
Management Dynamics Inc., 515 F.2d 801, 807 (2d Cir. 1975).
See also SEC v. Commonwealth Chemical Securities, Inc.,
574 F.2d 90; 99 (2d Cir. 1978).

The SEC has established that there is a substantial likelihood
that Brooksbank, Hantges, and Franklin will commit future Section
5 violations.*fn43 The SEC has established that these
defendants violated the securities laws. Brooksbank and Franklin
still maintain that their sales of the Curbstone Management
Shares were legal, among other things, pressing arguments
regarding exemptions that were rejected in Cavanagh, 1 F. Supp.2d 337
. Brooksbank is an attorney; Hantges and Franklin are
former securities industry professionals.*fn44 They are, or have been, engaged in occupations which present further
opportunities for violations of the securities laws. The
circumstances in which the present violations occurred show that
these defendants were at the very least reckless as to whether
the Curbstone Management Group was aiding a fraud on the market
and whether their personal profits were earned through a fraud.
They proceeded to sell their shares in February and March 1998
despite overwhelming evidence that there had been a massive
market manipulation. Finally, this violation was not an isolated
occurrence. At the time of the WTS/Curbstone transaction, the
Curbstone Management Group worked with Levy on a nearly identical
reverse merger for another shell company that they owned, Capital
Advisors.*fn45 There is every reason to believe that Capital Advisors, which was restructured in the same way as Curbstone,
would have been utilized for a "pump and dump" market
manipulation but for the SEC's intervention.*fn46 Franklin
was recently sued by the SEC for Section 5 violations and
securities fraud for his involvement in a stock website, "Red Hot
Stocks." Brooksbank set up an entity Franklin used in connection
with this project, and in the course of the SEC investigation
into the website, Franklin instructed Brooksbank to send abroad
documents pertaining to the company and Brooksbank complied. For
his part, Hantges was sued in federal court in 2003 for civil
RICO and common law fraud.

Brooksbank and Hantges represent that they are not currently
violating the securities law and will not do so in the future.
Such contentions are insufficient to prevent the imposition of an
injunction that is otherwise justified. See Management
Dynamics, 515 F.2d at 807 (a permanent injunction may be
appropriate despite "defendant's disclaimer of an intent to
violate the law in the future, or even cessation of the illegal
acts").

Brooksbank and Hantges emphasize that they relied on Chachas.*fn47 Their argument illustrates their continued
efforts to shift blame and responsibility for their illegal
actions. They knew or should have known that a registration
statement was required for the sale of stock, and that they were
assisting and profiting extravagantly from a market fraud. These
defendants were sophisticated businessmen with extensive
securities industry experience. See SEC v. Frank,
388 F.2d 486, 489 (2d Cir. 1968) (a defendant cannot escape liability by
"closing his eyes to what he saw and could readily understand").
The SEC has shown that a permanent injunction against Brooksbank,
Franklin, and Hantges is warranted.

2. Disgorgement of Proceeds

As an exercise of its equity powers, a court may order
defendants to disgorge their earnings from violations of the
securities laws. SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d
Cir. 1997). The "primary purpose" of disgorgement is the
deterrence of future violations "by depriving violators of their
ill-gotten gains." Id. It is a "nonpunitive equitable remedy."
Commodity Futures Trading Com'n v. Vartuli, 228 F.3d 94, 113
(2d Cir. 2000). "The effective enforcement of the federal
securities laws requires that the SEC be able to make violations
unprofitable. The deterrent effect of an SEC enforcement action
would be greatly undermined if securities law violators were not
required to disgorge illicit profits." First Jersey, 101 F.3d
at 1474. "[D]isgorgement need only be a reasonable approximation
of profits causally connected to the violation. So long as the
measure of disgorgement is reasonable, any risk of uncertainty
should fall on the wrongdoer whose illegal conduct created the
uncertainty." SEC v. Warde, 151 F.3d 42, 50 (2d Cir. 1998).
When apportioning liability for disgorgement among multiple
defendants courts have the discretion to find joint and several
liability when two or more individuals collaborate in the illegal
conduct. See First Jersey, 101 F.3d at 1475.

Once a court determines that disgorgement is appropriate, it
has the discretion to charge prejudgment interest. In deciding
whether an award of prejudgment interest is warranted, a court
should consider "(i) the need to fully compensate the wronged
party for actual damages suffered, (ii) considerations of
fairness and the relative equities of the award, (iii) the
remedial purpose of the statute involved, and/or (iv) such other
general principles as are deemed relevant by the court." Id. at
1476. In an enforcement action brought by a regulatory agency,
however, "the remedial purpose of the statute takes on special
importance." Id. When disgorgement is ordered in an
SEC-initiated proceeding, the IRS underpayment rate is
appropriate. Id. "[E]ven if litigation was protracted through
some fault of the SEC, the award of prejudgment interest for the entire period
is proper because defendant had use of unlawful profits for the
entire period." Warde, 151 F.3d at 50 (citation omitted).

Disgorgement in the amounts and manner requested by the SEC is
an appropriate remedy here against all defendants. Prejudgment
interest at the IRS underpayment interest rate is
warranted.*fn48 In particular, joint and several liability
for the Curbstone Management Group defendants for the proceeds
earned from the sales to the Spanish Nominees is appropriate. The
four men acted as one in the negotiation and sale of shares to
the Spanish Nominees, Levy, and Milestone, and through the option
and lock up agreements. Their concerted action was essential to
the success of the scheme.

Hantges contends that Grupo Mexicano De Desarrollo, S.A. v.
Alliance Bond Fund, Inc., 527 U.S. 308 (1999), compels a
different result. It does not. Grupo Mexicano held that a
district court lacks authority to freeze assets pending the
adjudication of a contract claim for money damages. Id. at 333.
There are various bases on which to distinguish Grupo Mexicano,
including the fact that the SEC has shown that it is entitled to
summary judgment against Hantges and it seeks disgorgement as an
equitable remedy based on that judgment. Hantges contends that the disgorgement remedy is limited to
securities violations involving fraudulent intent. Using their
powers of equity, courts can and have granted disgorgement
against defendants found liable under strict liability statutes
such as Section 5. See, e.g., Geiger, 363 F.3d at 488. See
also SEC v. Palmisano, 135 F.3d 860, 865 (2d Cir. 1998)
(Congress has expressly endorsed disgorgement for violations of
the Securities Act).

Brooksbank asserts that the SEC's disgorgement calculation is
wrong because it seeks proceeds rather than profits. Brooksbank's
argument fails for several reasons. Neither Brooksbank nor
Hantges or Franklin submitted evidence to dispute the data from
which the SEC calculated the disgorgement figures.*fn49
Disgorgement of proceeds as opposed to profits is appropriate
here. Defendants are not entitled to deduct costs associated with
committing their illegal acts.

3. Civil Penalties

Sections 21(d)(3) and 20(d) provide three tiers of civil
penalties for securities law violations. Each tier provides for
the penalty not to exceed the "gross amount of pecuniary gain to
such defendant as a result of the violation." 15 U.S.C. § 77t (d). Tier I penalties, for non-scienter violations, shall not
exceed $5,000*fn50 per natural person for each violation.
Id. Tier II penalties are available if the violation involved
"fraud, deceit, manipulation, or deliberate or reckless disregard
of a regulatory requirement" and shall not exceed $50,000 per
natural person. Id. Tier III penalties are available if the
violation involved "fraud, deceit, manipulation, or deliberate or
reckless disregard of a regulatory requirement" and the violation
"resulted in substantial losses or created a significant risk of
substantial losses to other persons" and shall not exceed
$100,000 per natural person. Id.

Courts have discretion in determining the appropriate amount of
any penalty and the amount should be determined in light of the
facts and circumstances surrounding the violations.
15 U.S.C. § 78u(d)(3) & 77t(d). A monetary penalty is designed to serve as a
deterrent against securities laws violations. Palmisano, 135
F.3d at 866. In determining what penalty to impose, courts look
to the following factors: (1) the egregiousness of the
violations; (2) a defendant's scienter; (3) the repeated nature
of the violations; (4) a defendant's failure to admit wrongdoing;
(5) whether a defendant's conduct created substantial losses or
the risk of substantial losses to others; (6) a defendant's lack
of cooperation with authorities; and (7) whether the penalty that would otherwise be appropriate should be
reduced due to a defendant's demonstrated current and future
financial condition. Lybrand, 281 F. Supp.2d at 730
(collecting cases). A court may also consider evidence of a
defendant's financial deception, including any evidence of a
defendant's violation of asset freeze orders. Id.

For Cavanagh, Nicolois, and Milestone, the SEC has requested a
civil penalty for each sale or offer to sell. The formula for
this penalty would be: $100,000 multiplied by four statutory
violations*fn51 multiplied by each of these defendants'
sales or offers to sell. In the alternative, the SEC asks for a
civil penalty against these defendants equal to the total loss to
investors which the SEC calculates as $15,564.863.02. As stated
above, Cavanagh, Nicolois, and Milestone do not contest the SEC's
request for civil penalties. The civil penalty assessed against
each of these defendants shall be $1,000,000.

With respect to Brooksbank, Hantges, and Franklin, the SEC has
asked for a civil penalty of at least $125,000 to
$175,000.*fn52 Brooksbank and Franklin continue to deny
their own liability. All three defendants were essential
participants in a significant market manipulation from which they
earned hundreds of thousands of dollars. None of them has
presented any evidence that his financial condition warrants a reduction in the size of a
penalty.*fn53 Considering these facts and the others already
discussed in this Opinion, a penalty of $125,000 is imposed on
each of these three defendants.

V. Section 5 Claims: Recovery from Relief Defendants

The SEC has moved for summary judgment against relief
defendants Karen Cavanagh, Beverly Nicolois, Kaufer, and Cromlix.
The SEC seeks to disgorge the EOSC proceeds these defendants
received. While the relief defendants have opposed summary
judgment on the underlying violations against the defendants,
they have not contested the legality of such a remedy against
relief defendants or the amount of money the SEC seeks to
disgorge from them.

Federal courts may order disgorgement "against a person who is
not accused of wrongdoing in a securities enforcement action
where that person: (1) has received ill-gotten funds; and (2)
does not have a legitimate claim to those funds." Cavanagh, 155
F.3d at 136. When there has been no consideration given for the
receipt of the ill-gotten gains, there is no legitimate claim to
the funds and a relief defendant must return the proceeds. See
id. at 137.

The SEC has submitted sufficient evidence to award summary judgment and to disgorge the proceeds received by Karen Cavanagh,
Beverly Nicolois, Cromlix and Kaufer. Karen Cavanagh and Beverly
Nicolois, through Cromlix, received proceeds from the sale of
EOSC stock transferred to them at their husbands' direction from
the Spanish Nominees. Neither Karen Cavanagh nor Beverly Nicolois
paid consideration for these shares. A default judgment has
already been entered against the Spanish Nominees. Similarly,
Kaufer received part of the proceeds Brooksbank received from
Curbstone Management Group's sale of unregistered EOSC shares.
Kaufer has not asserted any legitimate claim to this money; he
did not pay material consideration for what was essentially a
gift from Brooksbank.

Conclusion

The SEC's motion for summary judgment against defendants
Cavanagh, Nicolois, and Milestone for violations of Sections
5(a), 5(c) and 17(a) of the Securities Act, and Section 10(b) of
the Exchange Act is granted. The SEC's motion for summary
judgment against Brooksbank, Franklin, and Hantges for violations
of Sections 5(a) and (c) is granted. Summary judgment against
relief defendants Karen Cavanagh, Beverly Nicolois, Cromlix, and
Kaufer is also granted.

Defendants Cavanagh, Nicolois, and Milestone are permanently
enjoined from violating, directly or indirectly, Sections 5(a),
5(c) and 17(a) of the Securities Act, and Section 10(b) of the Exchange Act. Cavanagh, Nicolois, and Milestone are ordered to
pay, jointly and severally, disgorgement of $15,564,863.02  plus
interest, less any disgorgement amounts actually paid by other
defendants and relief defendants. Cavanagh, Nicolois, and
Milestone are each ordered to pay a civil penalty of $1,000,000.

Defendants Brooksbank, Franklin, and Hantges are permanently
enjoined from violating, directly or indirectly, Sections 5(a)
and (c). Brooksbank, Franklin, and Hantges are ordered to pay,
jointly and severally, disgorgement of $889,275.00  plus
interest. In addition, Brooksbank, Franklin, and Hantges are
ordered to individually pay disgorgement of $185,337.79,
$50,926.50, and $304,654.29, respectively, plus interest.
Brooksbank, Franklin, and Hantges are each ordered to pay a civil
penalty of $125,000.

Relief defendants Karen Cavanagh, Beverly Nicolois, and Cromlix
are ordered to pay, jointly and severally, disgorgement of
$803,660.75. Relief defendant Kaufer and defendant Brooksbank are
ordered to pay, jointly and severally, disgorgement of
$213,150.97. Prejudgment interest is awarded for these amounts.

The SEC's motion to preclude defendants Cavanagh, Nicolois, and
Milestone, as well as relief defendants Karen Cavanagh, and
Beverly Nicolois from offering any evidence in opposition to
summary judgment is denied. The SEC's motion to preclude these
defendants and relief defendants from relying on Cavanagh's
Hearing testimony is granted. The SEC's motions to strike inadmissible portions of
Brooksbank's and Franklin's affidavits and statements of material
facts, as well as Batista's affirmation are granted to the extent
described herein.

The SEC shall prepare proposed judgments based on these
rulings.

SO ORDERED.

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